How Crypto Lending Behaves in a Falling Interest Rate Environment
As traditional financial institutions adjust their lending strategies to the Federal Reserve’s rate cuts, crypto markets often follow a different path. While falling interest rates generally signal lower borrowing costs across traditional finance, the relationship in crypto is less direct. Crypto lending rates, particularly for assets like BTC, tend to move in tandem with the demand for leverage rather than central bank rate decisions.
This divergence was evident during the recent Fed’s September rate cut of 50bps. While most expected lending rates across markets to dip, crypto rates rose. The explanation lies in the unique structure of crypto lending markets, which often mirror the BTC basis trade—essentially the difference between bitcoin’s spot price and its futures price.
The Basis Trade Effect on Crypto Rates
Unlike traditional finance, crypto’s lending and borrowing rates aren’t solely driven by central bank policies. Instead, they often reflect the demand for leverage tied to market sentiment. When the Fed cut rates, signaling a more accommodative monetary policy, markets shifted to a risk-on environment, prompting traders to take on more leverage in search of higher returns. This was especially true in the case of BTC.
As investors leveraged up to buy BTC, borrowing demand surged, driving crypto lending rates higher, not lower. This dynamic reflects the broader crypto market’s response to risk. When confidence is high, demand for leverage increases, pushing rates up. In contrast, during periods of risk aversion, rates tend to fall as traders unwind their positions.
Opportunities for Institutional Players
While crypto lending rates haven't dropped as much as expected, there are still opportunities for those with access to traditional financial rails. In a declining rate environment, institutions can take advantage of cheaper financing from traditional sources. At Galaxy, we aim to pass these reduced borrowing costs on to our clients. However, the crypto market hasn't seen rates meaningfully fall yet, largely due to market sentiment and leverage demand. Still, understanding these dynamics can help institutional players capitalize on arbitrage and yield opportunities as rates eventually adjust.
Crypto’s detachment from traditional interest rate policies underscores its unique appeal. As rates fall and risk-on sentiment drives up demand for leverage, the potential for higher lending rates creates a distinct landscape for institutional borrowers and lenders. Understanding the interplay between central bank moves, market sentiment, and crypto lending dynamics is key to navigating and capitalizing on these shifts.
++
Contact our Lending Desk for more information on this topic.
Want more Lending content? Subscribe to our Monthly Commentary.
This document, and the information contained herein, has been provided to you by Galaxy Digital Holdings LP and its affiliates (“Galaxy”) solely for informational purposes. Galaxy provides comprehensive financial products and services to institutions, corporates, and qualified individuals (typically Eligible Contract Participants and accredited investors) within the digital asset ecosystem. This document may not be reproduced or redistributed in whole or in part, in any format, without the express written approval of Galaxy. Neither the information, nor any opinion contained in this document, constitutes an offer to buy or sell, or a solicitation of an offer to buy or sell, any advisory services, securities, futures, options or other financial instruments or to participate in any advisory services or trading strategy. Nothing contained in this document constitutes investment, legal or tax advice. You should make your own investigations and evaluations of the information herein. Any decisions based on information contained in this document are the sole responsibility of the reader. Certain statements in this document reflect Galaxy’s views, estimates, opinions or predictions (which may be based on proprietary models and assumptions, including, in particular, Galaxy’s views on the current and future market for certain digital assets), and there is no guarantee that these views, estimates, opinions or predictions are currently accurate or that they will be ultimately realized. To the extent these assumptions or models are not correct or circumstances change, the actual performance may vary substantially from, and be less than, the estimates included herein. None of Galaxy nor any of its affiliates, shareholders, partners, members, directors, officers, management, employees or representatives makes any representation or warranty, express or implied, as to the accuracy or completeness of any of the information or any other information (whether communicated in written or oral form) transmitted or made available to you. Each of the aforementioned parties expressly disclaims any and all liability relating to or resulting from the use of this information. Certain information contained herein (including financial information) has been obtained from published and non-published sources. Such information has not been independently verified by Galaxy and Galaxy does not assume responsibility for the accuracy of such information. Affiliates of Galaxy’s own investments in some of the digital assets and protocols discussed in this document. Except where otherwise indicated, the information in this document is based on matters as they exist as of the date of preparation and not as of any future date, and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after the date hereof. The foregoing does not constitute a “research report” as defined by FINRA Rule 2241 or a “debt research report” as defined by FINRA Rule 2242 and was not prepared by GalaxyDigital Partners LLC. Similarly, the forgoing does not constitute a “research report”, as defined under CFTC Regulation 23.605(a)(9), and may only be considered a solicitation for entering into a derivatives transaction for purposes of CFTC Regulation 23.605. It is not intended to constitute a solicitation for any other purposes under CFTC or NFA rules, and it should not be relied on as a form of recommendation to trade under CFTC regulations. Any statement, express or implied, contained within these materials is subject, in all cases, to the actual terms of an agreement entered into with Galaxy Digital on a principal basis. The Information is being provided solely for informational purposes about Galaxy Digital and may not be used or relied on for any purpose (including, without limitation, as legal, tax or investment advice) without the express written approval of Galaxy Digital. The Information is not an offer to buy or sell, nor is it a solicitation of an offer to buy or sell, any investment banking services, securities, futures, options, commodities or other financial instruments or to participate in any investment banking services or trading strategy. Any decision to make an investment or enter into a transaction should be made after conducting such investigations as the investor deems necessary and consulting the investor’s own investment, legal, accounting and tax advisors in order to make an independent determination of the suitability and consequences of an investment. Additional information about the Company and its products and services can be found at Galaxy Digital’s website at galaxy.com. For all inquiries, please email [email protected]. ©Copyright Galaxy Digital Holdings LP 2024. All rights reserved.